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Monday, March 17, 2008

About PE ratios and the right time to buy

I was asked an important question by Raghu, and I thought I'd blog it for everybody else alsoRaghu said...Hi Naveen.Today I read in TOI that the Sensex may breach 11000 levels which means there is still lot of downside left.In such scenario do you think it is a good time to open the positions? I am not talking about value stocks like JKL but some good stocks which have taken the beating along with junk stocks. Though I understand that an optimum PE Ratio for each co varied based on its future prospects can you pls advice as to is there any standard/PE for evaluating Small/ Medium and large scale firms respectively.Also I have noticed that after a bear phase market gives an excellent returns for the following next 2 -3 years. Is it true or just a co-incident. Just a curiosity question pls.Hi Raghu, it is the nature of the market that the participants get overly optimistic when the times are good and overly pessimistic when the times are bad. There are excesses on the way up and also on the way down. A good player will choose his/her target company carefully and should be able to evaluate it both in relation to and independent of the Indices.

You've asked me what is the optimum PE ratio for various groups of companies. There is no standard PE ratio which will fit every stock. It will vary from industry to industry and from stock to stock. Take for example, a stock like Punj Lloyd. I gave a sell on that stock when it was trading around 500-550 levels. At the same time many so called 'Analysts' (the ones who regularly appear on certain TV channels) were singing praises of that stock and advising a buy. The stock today closed at 297. Most people would think it is a great opportunity to buy that stock because it has fallen 45% from its highs. But do you know what PE it is trading at even now for FY08? 27!! That means that it was trading at a PE of 50 when the price was at 550. Compare that with the the current PE of JK Lakshmi which is less than 2.5.

How would you reconcile this anomaly? The truth is that the market does not always run on fundamentals. In fact, it seldom runs on fundamentals. More often than not, it runs purely on the will of the Operators and the Hype generated about that stock. But this is true only in the short to medium term. This is so because the vested interest parties cannot keep the price of a stock up or down as per their convenience beyond the medium term. In the long term the true fundamentals of a stock have to catch up. Punj Lloyd is just an example I am giving to elaborate my point. If you look closely, you will find that Punj Lloyd is still Up nearly a 100% from its year's low of 147 which was the prevailing price in April, 2007. But public memory is short, so they don't remember the figure of 147 attached with Punj Lloyd, they only remember the recent high price of 550. If you ask me, then the fair value of this stock should be between 150 and 175....................maximum 200. But the 'TV Analysts' would have you believe that it is a great buy even at 550!

At the peak of the recent Bull market, certain Power stocks were trading at PEs between 70 and 100. Thankfully, today many of them have come down to nearly half that. Though there is no thumb rule as to what should be the Optimum PE limit for any stock, I personally would be very uncomfortable in buying any stock over a PE of 25, no matter how good the company or the management, in the present scenario.

Coming to the last part of your question.........ofcourse bear markets give an excellent opportunity to buy good stocks at throwaway prices, but provided you buy the right stocks and for the long term. The simple basic rule of the market is to buy low and sell high. But it is ironical that most people actually end up doing the opposite.Cheers!

Absolutely the gospel truth. For me, I started investing only during the last two years, never realizing what the word bear means. Though I am still making money, this fall has made me wiser, so to say the least and the fact that never get emoitional or attached to stocks !! Cheerio

Hi Annam,Thanks. Aurobindo is an absolute buy at current levels and on dips for long term.

Hi Amit,Thanks. Bihar Caustic is certainly a good stock to buy for long term on dips. Orchid Chemicals is the unfortunate victim of the Bear Stearns fiasco. It has lost 50% of it market value in a matter of just two days. It is a buy at cmp for long term.

Hi Sameer,Thanks. One of the most common mistakes people make is to get emotionally attached with the stocks they own. The market is always in a flux and you have to keep thinking on your feet all the time. It's all about relative valuations and relative returns. You have to pick the stocks which you think are most likely to perform at any given time on a relative basis.

In the present scenerio buying any stock seems to be crime. You buy any stock today next day it is available at 5 to 10% discount. I have a large quantity of j. Neeco and J.k . Laxmi cement. I started averaging these stock from Rs. 37 and Rs. 119 respectively. Now the rates are 26 and 101. Now i donot have enough money to average out again. I have again got some strong recommendations from my broker and friend for j. neeco. They say it may touch Rs. 200/- in next two years. Can You please explain the fundamentals of j. neeco in detailwhich may support such a high price as you did for J.k. Laxmi.

I hope u will make me a member of your group.I have studied yr previous tips which were multibagger but i doubt this would be!!!!!If u want may br I can suggest few companies and u may give me yr opinion

Hi All,I know it is frustrating to see perfectly good value stocks also going down after you buy them at what you thought was the low for the stock. It is near impossible to time the market and buy exactly at the bottom. Anyone who is buying now should understand one thing that you are buying whatever you are buying for the LONG TERM (minimum one year), and not for the short term. If you have chosen your stock carefully and bought well management companies with good growth prospects quoting at low single digit PEs, then you should not unnecessarily lose your sleep over them. Quit seeing the price movements on a day to day/hour to hour/and in some cases minute to minute basis. Once you are convinced you've invested in a good business then forget about it for a few months. Give your investment time to perform.

Cheers!

Hi Satheesh,I like Sri Lakshmi Cotsyn. It is an investment grade stock.

Hi Hardik & Ashok,Jay Neco and JKLAKSHMI CEMENT are available at mouth-watering prices right now. According to me, one can invest in them.Hardik, there is no stop loss for JKLAKSHMI, it is a buy at every level if you are a genuine investor.

Dear Superstar,This is a question which is out of this topic. However I want your reply. What ever amount I had invested, I had earned a good profit up to pick of the index. But I had reinvested gradually till the index came back to 18000.Now I have no money to average/buy, though this is write time to enter. Now my entire investment is accruing heavy losses. To avoid further loss, I want to sell all my holdings and sit with cash. When the market will stabilise, I will reenter with new portfolio as per your suggestion given earlier/recent. Kindly give your advice, what will be the best strategy for me or should I hold my existing stocks for another one or two year?Regards.

Wht's your call on Nocil and HFCL? Are they good enough to hold? I had purchased 20000 cybermate info @16. Now it's trading below 5 rupees. I have almost lost 2.5 lakhs in this stock. I'm really not sure wht to hold and wht to sell as i am seeing 7lakh loss in my portfolio. Plz help me.

Hi Satheesh,Both Sri Lakshmi and Jindal Photo are good buys at present levels if you have a long term view. Both present very good value.

Hi Prativa,What strategy you should follow currently would depend purely on which stocks you are holding. You havn't disclosed your holdings, so I cannot comment.

Hi Achilles,Yeah, that stock can be bought in a systematic investment plan on dips, if you have a long term view.

Hi Raja,All your three stocks are of high risk high reward type. At present prices they are trading near or at their lows. They can be held for now, but you can exit on any rallies.

Hi Ashok,I have already named Allahbad Bank as one of the best picks in the PSU banks. That, along with JK Lakshmi are safe bets for long term. IDBI is likely to be a market performer at best, and not a market outperformer.

Hi Vicks,Thanks for your appreciation. You can hold all your stocks except VBC Ind and Nandan. You can switch from them to better quality stocks like JKLAKSHMI Cement. Remi Metals is a loss making company and was up only on takeover news/rumour. I wouldn't touch it unless I had confirmed news on it.

Hi Superstar you are our real hero.you are the lighthouse for small investors.I have a small query.i purchased the following stocks .Prime securities 300rssouuthasp 25rs(misery is that i didn't sell at 40rs which is now at 14rs)rain commodities 225rsAlps indisties 80rsnow they are on their lows.i can wait for 1 to 1-1/2 years.u want me to book loss.are u want me to wait on individual stock basis.please kindly guide us

Hi Ashok,If you are holding Confidence Petro, then you can continue to hold. But fresh buying not advised.Facor alloy is better than Facor steel.

Hi Ravi,Thanks. All your stocks are likely to go up from present levels, in the next one/one & half years. But to optimize your returns you can switch from Rain to JKLAKSHMI immediately and exit Alps in rallies when it reaches around 55 levels and switch to some other good stock at that time.

Hi Sameer,Both Mastek and Apollo tyres are holds. For fresh buying, better stocks available in the market.

hey superstar;Can u please write a blog describing how 2 research a stock i.e.fundamental,technical n accounting research as u write abt stocks.please n also please mention the source of info in nthe sense how 2 get it.

Please suggest me on Mastek, I want to buy it tomorrow. One of my friend has suggested it and he told me that its a great company to be in. I have checked the PE and its around 8 and Reliance MF has bought may shres yesterday. Can you please suggest me why there is lot of hype created in MASTEK. Is it really worth buying?

Hi friends,Hope you all had a good weekend. I have been quite busy and I'm sorry I won't be able to reply to individual queries just yet. Just wanna say that you can buy cautiously stocks of established companies trading at PEs of 10 or below whenever there is a dip in the market with a long term view. Buying in highly expensive stocks, PE ratio wise, is not yet advised. Particularly stay cautious with high beta stocks like the Financials and Real Estate.

Can you comment on Salora International? The board has announced 50 crores fund raising recently.

Also Jindal Photo Films- you have said it is a good buy; given that still a portion of the business is from the traditional photo film market, can you throw some light as to why you recommend this stock?

Hi Atal,I would be more comfortable buying Praj near 100 levels. You may keep a 12-18 months target of 175 on it.

Hi Kavita,Salora can be bought on dips. I did not go out of my way to recommend Jindal Photo. Someone had asked me if he could buy it at the prevailing price at that time (around 131 I think) and I responded in affirmative. The stock has bounced a little since last week. Valuations wise the stock looks attractive. I haven't gone deep into that company's future growth plans.

Hi Hardik,Celestial labs looks fairly valued at cmp considering the prevailing mkt condition. I would wait to see Alpa's quarterly results before making any fresh investment in it.

Hi Achilles,Browse this site for older blogs from me and you might see one post on the subject you have asked about. I may write again on the subject whenever time permits. I am hard pressed for time right now.You haven't given full name of ASIL ind...i couldn not figure which stock you were asking about. It's not listed on Bse?

Hi Sanjay, Pennar, KCP Sugar, Shree digvijay are all holds at best at cmp. For fresh buying, much better stocks are available in the market.

Hi Amit,Batliboi seems like a good hold at the moment. Wait for the markets to recover.

Hi Murugan,You can take a look at JKLAKSHMI Cement, Allahabad Bank, Agrodutch, Godawari Power. All can give good returns for the long term.

Hi Raghu,I would advice you not to depend upon moneycontrol site for any financial figures. Most of the time they post WRONG and OUTDATED information. Get the financial results directly from the companies' or exchanges website and calculate the ratios yourself. The PE figure mentioned by your for IFCI is wrong. Even though the PE ratio is not high in case of IFCI, it is purely a news driven stock and will move on any fresh news of its stake sale. There are better quality stocks available in this sector.

Hi Achilles,Anil special is one of those stocks in the metals space which had a great run till the first week of Jan like most low priced stocks. From present level, the downside is limited, but there is a big question mark on the future growth prospects of this sector as a whole, due to price control measures by the govt. This stock will perform in line with the rest of the stocks in this sector.

Regarding IFCI, Banks and other institution debts were converted into equity @ Rs. 107/-. Don't you thing this is a valid reason for this stock to move significantly from here. Also seeing the hodlings and assets of this company the value of this share comes out to be Rs. 75/- approx.

Your call on Gujrat NRE. This is one of the few stock which has not fallen at all from it's peak. Do you recommend buying?

Hi Ashok,In absence of any particular news on IFCI, I don't consider that to be an investment grade stock. Period. Just because some entity bought it for 107 is not reason enough for it to go up. If that was the case, then Jai Corp was placed at nearly 1100 rupees to institutional buyers just a couple of months back. And I had given a sell call on it then......why is it currently at 495??

Gujarat NRE has remained quite steady during the whole mayhem. But I would not be comfortable buying it at a price above 120 at present.

LIC Housing is a hold and buy on dips for long term.

Hi Ravindra,All the stocks named by you are good buys on dips and certainly holds at current levels for long term.

Hi Hellraiser,The management of Lok Housing is like that of Teledata. You never know what they are upto. The stock looks cheap valuation wise but there are a lot of hidden factors. It's a very high risk and high return type of stock.

Hi Sameer,Balmer Law is good stock to be bought on dips. One can start buying for long term at current levels.

Hi Atal, Your question about Lok is already answered above. As compared to LIC Housing, it is a much riskier stock. But can give high returns also if the operators/management of the company so desires.

Hi Hardik,I have been advising a buy on TCS ever since 780 levels here and today it is at 914. For long term it can still be bought, but for short term I see maybe a target of 1000 where some profit can be booked.Tata Motors is a hold at present. For fresh buying, many better bets available.

Can you please suggest few stocks of future group which has almost bottom out in your opinion. The idea is to buy these stock in cash and keeping selling higher calls, so that one can have 4-5% monthly return. If the share moves up we have the delivery, otherwise we get the call amount and reduce the cost. I will be grateful if you can comment on this type of trading and whether i should go for it. Few stocks which comes to my mind are: Allahabad bank, LIC housing, NTPC, Power Grid, DLF, Infosys, Chambal fertilizer etc.

Cairn india is moving up gradually and is almost near to its top. What's your call and do you recommend buying. Jayaswal necco is seeing UC daily. Whether hold or quit? At what level one should get out.Thanx

PEs help us identify companies which are candidates for a buy or sell. However, some of these other metrics like FCF, earnings yield help us drill down the best possible candidates from a set of numerous low PE companies.

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All information posted on this web site has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Under no circumstances is this an offer to sell or a solicitation to buy securities discussed on this site. Past performance is no guarantee of future success. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. I have positions in some of the companies discussed. All data, information and opinions are subject to change without notice. (c) 2007 All Copyrights belong to Superstar